In ruble terms, the oil collapse has been less severe and has resulted in windfall profits for Russian oil and gas companies, but not a proportionate amount of revenues for the state budget. Source: EIA

The US Energy Information Administration published the report “Low oil prices have affected Russian petroleum companies and government revenues”.

According to the report, low oil prices are having a significant affect on the Russian state budget due to lower tax revenues from the oil and gas companies. However, the oil companies themselves aren’t feeling the squeeze, since the design of the Russian tax system allows for companies to pay lower taxes amidst lower oil prices. Therefore, the companies, which have their operations denominated in local currency and revenues in dollars, can keep a larger share of revenues, and continue to increase their spending in ruble terms.

In Russia, oil and gas companies pay a mineral extraction and export tax, but there is no profit-based taxation.

“The favorable tax structure and exchange rate for Russian oil companies, the subsequent continued high investment levels at Rosneft, Lukoil, and other Russian oil and natural gas companies,” the report published on October 20, said.

The Russian government is expected to overhaul the tax scheme, but is met with opposition from the energy companies, who argue more taxes will stunt investment.

In June 2014, oil prices hit a record high of $114, and just six months later, a barrel of crude traded for $50 per barrel in January 2015. About a year later, a new nadir was reached: both Brent and WTI benchmarks fell below the $30 per barrel threshold.

Russia’s Central Bank preemptively switched the ruble to a free-float regime in November 2014, which helps offset losses from the collapse in oil prices.

So while Brent (which Russia uses to price its main export blend Urals) declined by 47% in 2015 versus 2014, and then another 31% in the first half of 2015, Russian federal budget revenues from oil and gas only fell by 21% and 29, respectfully.

Rosneft and Lukoil are two of the largest Russian oil companies, and together account for about half of the 11 million barrels of crude oil that Russia produces per day. Following the oil price crash, in 2015 Rosneft increased capital expenditures for exploration and production by 30% compared to the previous year. On the contrary, Lukoil’s expenditures on exploration and production projects fell by 11% in the same time period (see figure below).

Source: EIA

The EIA notes that the favorable tax structure and exchange rates are responsible for bringing production to record highs.

With the exception of independent producers such as Lukoil and Novatek, the majority of Russian oil and gas companies are state-owned, and the Russian government, as the main stakeholder, collects dividends. In April 2016, the Russian government ordered state-controlled companies to pay 50% of 2015 net income out as dividends, nearly double the dividends companies would normally pay, according to the EIA report.

Low oil prices and Western sanctions hit Russia just as the economy was losing steam and heading into a recession. At present, Russia has a budget deficit of 3.3% of total economic input, and many ministers are pushing for higher taxes for the oil and gas industry to fill the gap.

On October 18th, Russia’s largest natural gas producer and exporter Gazprom announced that exports to Europe and Turkey reached an absolute daily high of 578.9 million cubic meters. The increase reflects Gazprom’s intensified struggle to gain market share in non-CIS countries. In order to achieve this, Gazprom is implanting new export plans and increasing investment in long-term projects.

By the end of the year, total investments will have amounted to 853 billion rubles (about $1.37 billion USD), an 11 billion ruble increase (about $176 million) from investments in 2015.

“Winter hasn’t started yet, but the demand for Russian gas in non-CIS countries is if as if it is bitter cold in Europe. This demonstrates that Russian gas is highly competitive and in high demand on the European market,” Gazprom CEO Alexey Miller said in a statement by the company’s press service.

He added that the increased demand also verified the need for new Nord-Stream 2 and Turkish Stream to deliver gas to foreign customers.

Traditional Russian gas exports via pipeline must now compete with shale oil from the US, as well as the rapidly developing LNG market. The emergence of both have made the global gas market more liquid, and prices more competitive.

Before, Gazprom held a monopoly on the European market, and was able to index gas prices to oil. With more players on the market that offer greater delivery flexibility, prices move towards spot indexation. In order to stay competitive with lower oil prices, Gazprom has had to negotiate its contracts with European customers and offer lower prices.

Gazprom says that it is closely following trends in foreign markets. The company believes that the US will remain a major producer of shale gas in the mid to long term future. Gazprom doesn’t believe that development of Russian shale gas is necessary since reserves and the traditional extraction method will last into the foreseeable future.

Now that the US has opened the Sabine Pass LNG port, it could, in theory, send natural gas all over the world. However, in practice, this product is mostly destined for Latin and South America, as it’s priced out on the European market by Gazprom and Australia and Qatar so far have a monopoly on the Asian market.